23 comments:

Reading LK's screed on his blog again demonstrates that he either does not understand economic calculation or else he is purposefully and fraudulently limiting its application.

The lack of prices in the USSR is one form of economic miscalculation. Prices for houses, capital goods or consumers goods distorted by funny money dilution or government spending are additional and important forms of economic miscalculation.

The general principle is the lack of knowledge in society about economic supply and demand (and whims and taste etc...) and how that information can only be transmitted through unadulterated prices as the result of voluntary exchange. Communism and Keynesianism both distort that information feedback loop.

LK is a clueless liar.

Jonathan Finegold Catalan has examined in much more detail LK's complete butchering and misunderstanding of the concept of economic calculation and miscalculation.

(3) distortions of prices away from their equilibrium values (as postulated by (4) below) by government interventions allegedly leading to Cantillon effects

(4) in general, obstructions to flexible wages and prices and therefore to a price vector that will clear all markets (with flexible wages clearing the labour market), as in this quotation of Hayek:

“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.” (Hayek 1975: 6–7)----------If "yes", your statement that I do not understand what you mean by "economic (mis)calculation" is false.

If "no", then presumably these things have nothing to with what Austrians complain about when they talk of alleged "economic calculation problems"!

(2) LK is a clueless liar.

Demonstrate what statement in my post is a, or at least which statements are false.

(3) "Jonathan Finegold Catalan has examined in much more detail LK's complete butchering and misunderstanding of the concept of economic calculation and miscalculation."

No, he mainly had semantic quibbles about the Austrian business theory, or kept stressing things I already acknowledged in previous comments on this subject.

Also, I'd be very surprised indeed if Catalan actually believes what you believe.

I believe the phrase "economic calculation" in the context that Bob and I assume all Austrians use it is teleological and thus unscientific.... it proposes a "purpose" to non-individual activities/events... it's "magic thinking" imo.

"Since the Novum Organum of Francis Bacon teleological explanations in science tend to be deliberately avoided because whether they are true or false is argued to be beyond the ability of human perception and understanding to judge."

It really does not hurt my feelings if you guys insist upon a purposeful failure to understand Austrian Economics. And it really does not hurt my feelings if you insist, like LK, that 90% of the core concepts of the Austrian School are not really part of the analysis. I think it's great if that's going to be your "final answer" to the debate.

LK: Also, I'd be very surprised indeed if Catalan actually believes what you believe.

J-Cat: The only thing that LK’s response has really proven is that he does not understand the argument I was making, and therefore does not hold comprehensive knowledge on the Austrian theory of economic calculation. This fact is embodied in the unnatural focus he holds on the theory of intertemporal discoordination — which we would not miss if it were left out of this particular discussion altogether —, which forms only a single portion of the entire body of theory that describes the workings of a market economy (i.e. the market process, or economic calculation, or the theory of market coordination/discoordination).

When I said, "I'd be very surprised indeed if Catalan actually believes what you believe" - I meant I would be very surprised if Catalan thinks that Hayek's market-clearing wage and price vector has nothing to do with Walrasian theory (which is the incredibly absurd thing you believe).

"J-Cat: The only thing that LK’s response has really proven is that he does not understand the argument I was making, and therefore does not hold comprehensive knowledge on the Austrian theory of economic calculation. This fact is embodied in the unnatural focus he holds on the theory of intertemporal discoordination — which we would not miss if it were left out of this particular discussion altogether —, which forms only a single portion of the entire body of theory that describes the workings of a market economy (i.e. the market process, or economic calculation, or the theory of market coordination/discoordination).

Catalan says that the ABCT "forms only a single portion of the entire body of [sc. Austrian - LK] theory that [allegedly - LK] describes the workings of a market economy".

He is correct. And I always admitted that. In fact, I just listed above all the other things Austrians think of when they invoke "economic calculation."

I'm quite certain that I am the person who sent J-Cat the 1975 Hayek booklet a few years ago.

Read page 7 from the top which precedes the quote about "equilibrium structure". He speaks of a "distortion in the price system that has directed resources to false uses". He then calls the "equilibrium structure" a somewhat misleading term.

Further, prices can clear for years and years during a boom phase even though they do not qualify as the Hayekian "equilibrium structure". For Hayek, "the equilibrium structure" of prices consists of the unadulaterated prices which do not lead to "false uses". During a period of intervention, those prices do not exist and thus, cannot be statistically measured. That is not anything like Walsarian GE. Read the damned pamphlet, you lying bastard.

"For Hayek, "the equilibrium structure" of prices consists of the unadulaterated prices which do not lead to "false uses". During a period of intervention, those prices do not exist and thus, cannot be statistically measured. "

And the fundamental "equilibrium structure" is nothing but Walrasian GE theory.

You seem unaware that when Hayek gave that talk his audience I don't doubt must have consisted of neoclassical economists, who would have nodded their heads in agreement when they heard Hayek invoke his "equilibrium structure of prices and wages" - for that is also precisely what they believe.

This is the final word on this session of LK's purposeful distortion of the "Hayekian equilibrium structure" as explained weeks ago by Major_Freedom:

Yes, Hayek started with the idea of GE as a mental tool to show other economists how market intervention deviates the economy away from what it would have been on a free market. In this sense, Hayek’s discussion had SOMETHING to do with market clearing Walrasian price vectors.But you are going too far in saying that Hayek’s arguments somehow logically depend on, or are argumentatively derived by, Walrasian equilibrium. In the strict logical sense, Hayek’s argument really doesn’t have anything to do with Walras’ work.

To Hayek, “equilibrium” is what would prevail on the market. It is not Walras’ price vector.

I am sure if you asked Roddis where Hayek even came up with the concept of “equilibrium” in the first place, he’ll say “Walras”. In this sense, the sense that I “conceded” to you, Hayek’s discussion does “have to do with GE.”I mean, Keynes’ theory “has to do with” middle age mercentilism in the sense that that is where his ideas are rooted, even if he had different conceptions of what mercentilist states should do, and even if he didn’t even call his theory mercantilist.

"we must free ourselves from what is a widespread but basically wrong belief. Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold, as the common belief that the value which gold has in other uses determines the value of money"

"it is an erroneous belief that the value of gold or any metallic basis determines directly the value of the money"

"it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value"

"I do believe that if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power."

"I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate. I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed... The moment there is any sign that the monetary income stream may actually shrink, I would certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose...

I would no longer maintain, as I did in the early ‘30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation."

“it is merely common sense that government, as the biggest spender and investor whose activities cannot be guided wholly by profitability, and which for finance is in a great measure independent of the state of the capital market, should so far as practicable distribute its expenditure over time in such a manner that it will step in when private investment flags, and thereby employ resources for public investment at the least cost and with the greatest benefit to society... To bring about the required changes in the rate of government investment promptly enough to act as a stabilizer, and not, as is usually the case, with such delays that they do more harm than good, would require that the whole investment programme of government be so designed that the speed of its execution could be accelerated or delayed at short notice."

"This is the final word on this session of LK's purposeful distortion of the "Hayekian equilibrium structure" as explained weeks ago by Major_Freedom"

Oh, and no doubt comments by the equally ignorant M_F must settle the matter.

Curiously, M_F could not give his opinion on this subject without violating the law of non contradiction. In his own words:

Yes, Hayek started with the idea of GE as a mental tool to show other economists how market intervention deviates the economy away from what it would have been on a free market. In this sense, Hayek’s discussion had SOMETHING to do with market clearing Walrasian price vectors.

But you are going too far in saying that Hayek’s arguments somehow logically depend on, or are argumentatively derived by, Walrasian equilibrium. In the strict logical sense, Hayek’s argument really doesn’t have anything to do with Walras’ work.

I cite Hayek for only a few reasons. First, he won the Nobel Prize for his work on the Austrian Business Cycle Theory. That doesn't mean he's right and really carries no weight at all in a debate, but I think it means opponents of the theory should at least KNOW WHAT THE F*** the concepts of the theory are.

Further, in February, 2011, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

The “knowledge problem” is real and it ought to be understood. It is at the core of Austrian School analysis but Keynesian, MMT and other inflationist schools recoil from having even a basic familiarity with such a core concept. LK hasn't a clue either. At its core, MMT totally fails because of the complete failure to address or even understand the "knowledge problem". Keynesians are constantly looking for excuses to not familiarize themselves with Austrian concepts. They no longer have any excuse.

Finally, the Hayek quote about gold come from a paper proposing complete abolition of government money and the allowance of private competing money:

As a result I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else.

http://mises.org/daily/3204

There is nothing for the totalitarian MMT central planner in that.

Also, the quote about Hayek and secondary inflation comes after he points out that if inflationists hadn't caused the crisis in the first place, there would be no need to endure a painful correction or liquidation. There would be no painful correcting deflation EVER.

If I had to do over again, I would have just said that Hayek's "equilibrium structure" was absolutely positively not the same thing as "market clearing Walrasian price vectors" because, as MF showed, there might be a scintilla of a relationship between the two concepts the size of a sub-atomic particle.

LK has to split these stupid hairs because he cannot win on substance.

"If I had to do over again, I would have just said that Hayek's "equilibrium structure" was absolutely positively not the same thing as "market clearing Walrasian price vectors" because, as MF showed, there might be a scintilla of a relationship between the two concepts the size of a sub-atomic particle. "

This appears to mark a retreat from the bizarre assertion that Hayek's "equilibrium structure" has nothing whatsoever to do with Walrasian GE.

"LK has to split these stupid hairs because he cannot win on substance."

On substance, even looking at private sector behaviour, the notion that the market has a tendency to a set of equilibrium prices across all markets is empirically nonsensical:

“in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market”

“To this category belong not only such obvious instances as the protection against violence, epidemics, or such natural forces as floods or avalanches, but also many of the amenities which make life in modern cities tolerable, most roads (except some long-distance highways where tolls can be charged), the provision of standards of measure, and of many kinds of information ranging from land registers, maps, and statistics to the certification of the quality of some goods or services offered in the market… These are the collective or public goods proper, for the provision of which it will be necessary to devise some method other than that of sale to the individual users.”

“The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be a wholly legitimate protection against a risk common to all, but a necessary part of the Great Society”

“With regard to education the primary argument in support of its being aassisted by government is that children are not yet responsible citizens and cannot be assumed to know what they need, and do not control resources which they can deote to the acquisition of knowledge; and that parents are not always able or prepared to invest in the children’s education as much as would make the returns on this intangible capital correspond to those on material capital...

The strong case for a government finance of at least general education does not however imply that this education should also be managed by the government”

(Law, Legislation and Liberty, Volume 3)

“There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom... there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. ... Nor is there any reason why the state should not assist the individual in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong... there is no incompatability in principle between the state’s providing greater security in this way and the preservation of individual freedom.

“To the same category belongs also the increase of security through the state’s rendering assistance to the victims of such ‘acts of God’ as earthquakes and floods. Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make provision for the consequences, such communal action should undoubtedly be taken.”

"Nor is the preservation of competition incompatible with an extensive system of social services – so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields."

"The question whether the state should or should not 'act' or 'interfere' poses an altogether false alternative, and the term 'laissez faire' is a highly ambiguous and misleading description of the principles on which a liberal policy is based. Of course, every state must act and every action of the state interferes with something or other."

I think that this framing is rather dated, and am not much interested in wasting time on it. I would put it in terms of Bernard Leitaer vs. those that favor state currency, including MMT, AMI, Positive Money, etc. BL's argument is that currency monopoly puts too much power in the hands of the state.

The counterargument is that ending state currency and instituting private monies instead reduces policy space to the degree that it is socially, politically and economically deleterious for the polis by giving too much power to the financial sector.

I think that this is a debate worth having.

There is a related debate worth having about national financial sectors having gone transnational in the global economy, and international institutions undermining national sovereignty. See Rodrik's trilemma.